The “Serious Claim” in German D&O-Insurance

In April 2016 the German Federal Supreme Court (Bundesgerichtshof) rendered two essentially identical decisions on two cases dealing with D&O-insurance. The matters were based on two cases which were decided by the Higher Regional Court (Oberlandesgericht) of Düsseldorf in 2013 and 2014 already, and which had created uncertainty and impatience in the insurance market for a while. Both policies which were the subject matter of the cases, contained a clause which concerned the occurrence of an insured event. This was defined by the first written raising of a claim for damages against an insured person. As usual now in D&O-insurance in Germany, both cases concerned a claim "insured vs. insured". This means that a company sued one of its managers for damages due to a violation of his duties towards the company. The insurers in both cases in their defenses expressed the opinion that these were not "serious claims", i.e. the claims would not have been made if there were no insurance. Both companies according to the insurers had no intention at all to extend their respective claims towards the private wealth of the managers. The claims were made under the principles of claims made policies only, in order to trigger the occurrence of an insured event and then to receive compensation exclusively from the insurers. This, however, were a misuse of the claims made principle.

Whilst the lower instance courts were sympathetic to these arguments, the Federal Supreme Court dismissed them in full. First, it stated that the insured company had the same status as a third party suffering damages. Thus the general principles of liability insurance apply also to the D&O-policies based on claims made basis and covering an insured vs. insured constellation, i.e. all claims of the company against its management in the event of violation of duties. The policy contained a clear definition of the trigger of an insured event, however no restriction as to the fact that the insurance cover would only be granted by the insurer, if the company also aimed at the private means of the culprit manager.

Also the fact that the manager had ceded his own claim as insured person to the insured company did not alter this result. The Federal Supreme Court ruled that such cession in liability insurance would be legally effective towards the damaged third party in any event, however in an insured vs. insured case the insured company should be treated as well like such a damaged third party for the purposes of enabling it to raise a claim for payment directly against the insurance company.

The two judgements are definitely landmark decisions which were long awaited by the market and having an effect for many future D&O-loss events in Germany.